Why Russia’s Economy Is Holding On

With oil exports strong in April, Putin avoids economic ruin while hammering Ukraine.

hirsh-michael-foreign-policy-columnist
hirsh-michael-foreign-policy-columnist
Michael Hirsh
By , a columnist for Foreign Policy.
A currency exchange office in Moscow
A currency exchange office in Moscow
People walk past a currency exchange office in central Moscow on Feb. 28. ALEXANDER NEMENOV/AFP via Getty Images

Despite predictions of doom for the heavily sanctioned Russian economy, nearly two months into Russian President Vladimir Putin’s invasion of Ukraine, his country’s oil exports to Europe and nations such as India and Turkey have actually risen, and its financial sector is so far avoiding a serious liquidity crisis.

Sanctions may work in the long run, experts say, but for now many of the same countries that are sanctioning Russia are still seriously undercutting their efforts by buying energy from it—in some cases in even larger amounts during April than in March.

“Putin is continuing to make at least a billion dollars a day selling oil and gas, and the lion’s share is from Europe,” said Edward Fishman, a former Europe specialist at the State Department. “Individual European countries are sending military assistance to Ukraine but it’s dwarfed by payments they’re making to Russia for oil and gas.”

Despite predictions of doom for the heavily sanctioned Russian economy, nearly two months into Russian President Vladimir Putin’s invasion of Ukraine, his country’s oil exports to Europe and nations such as India and Turkey have actually risen, and its financial sector is so far avoiding a serious liquidity crisis.

Sanctions may work in the long run, experts say, but for now many of the same countries that are sanctioning Russia are still seriously undercutting their efforts by buying energy from it—in some cases in even larger amounts during April than in March.

“Putin is continuing to make at least a billion dollars a day selling oil and gas, and the lion’s share is from Europe,” said Edward Fishman, a former Europe specialist at the State Department. “Individual European countries are sending military assistance to Ukraine but it’s dwarfed by payments they’re making to Russia for oil and gas.”

Despite Western restrictions on Russia’s financial sector, oil exports are up to 3.6 million barrels a day in April, compared with 3.3 million barrels a day the month before, said Matt Smith of Kpler, a firm that tracks oil cargo ships. “The big takeaway is that Russian crude oil exports are actually higher so far this month than they were last month,” Smith said. “It’s surprising.”

Or as experts from the Institute of International Finance put it in a report this week, Russia’s oil shipments in April are so far proceeding at a “record pace.” Even allowing for the large discount on Russian crude relative to global benchmarks, that means “oil export revenues are likely to surpass by a large margin the same month in previous years.”

Those revenues have driven Russia’s current account surplus to new highs. For the first three months of the year, it amounted to $60 billion, versus $120 billion for the entire year in 2021, supplying the Kremlin with fresh revenues to counteract the sanctions, even though Russia is far less able to buy supplies and parts from abroad due to sanctions bans. Russia is the world’s third-biggest producer of crude oil, behind the United States and Saudi Arabia.

The precise amount of oil that Russia is now exporting, and to whom, remains in some dispute. Experts say some of that crude is still in transport, in some cases to destinations unknown or to storage facilities. Much of it represents an honoring of long-term oil contracts while a European “wind-down” is in progress, said Christopher Haines, an analyst at Energy Aspects, a consulting firm in London.

Other energy experts suggest that Moscow is front-loading or boosting exports from existing stockpiles as it anticipates further Western sanctions on oil (and Western countries are snapping them up for the same reason, encouraged by Moscow’s sharply discounted prices). Russian refining domestically has actually dropped in the interim, Haines said. By early April, Russian oil production had fallen by 700,000 barrels a day, according to the International Energy Agency. That suggests Russia may be diverting limited production to exports rather than domestic refining.

For many European countries, natural gas is even harder to cut off than oil, as it tends to be traded on longer-term contracts through fixed pipelines, and it isn’t as fungible as oil. Though Germany soon after the invasion announced a halt to the new Nord Stream 2 pipeline from Russia, most Russian gas continues to flow into Europe as before. For now, alternative supplies of liquefied natural gas, which can be transported by sea, remain limited, especially in Central and Eastern Europe. To shift to alternative major producers such as the United States (the world’s biggest producer of natural gas, while Russia is No. 2), Qatar, or Canada could take years.

The European Union’s executive commission has sketched out a plan to slash Russian gas imports by two-thirds by the end of 2022 by importing more liquefied gas and switching to more pipeline gas from Norway and Azerbaijan, as well as stepping up wind and solar. But that plan remains vague, and many experts call it infeasible. It has also met stiff resistance, especially in Germany, which consumes the most Russian gas, amounting to a third of Germany’s total annual usage.

In an interview with Der Spiegel published Friday, German Chancellor Olaf Scholz suggested that Berlin couldn’t afford to cut off Russian supplies anytime soon, saying an embargo on Russian gas not only wouldn’t end the Ukraine war but could lead to “a dramatic economic crisis, the loss of millions of jobs and of factories that would never open again.” He added: “This would have major consequences for our country, for all of Europe, and it would also severely affect the financing of Ukraine’s reconstruction. As such, it is my responsibility to say: We cannot allow that to happen.”

Even U.S. Treasury Secretary Janet Yellen suggested this week that a ban on Russian oil and gas could potentially hurt Europe severely while “counterintuitively, it could actually have very little negative impact on Russia,” which would be able to find buyers elsewhere while driving up prices. “Europe clearly needs to reduce its dependence on Russia with respect to energy, but we need to be careful when we think about a complete European ban on, say, oil imports,” Yellen said.

The only energy exports that Europe has managed to wean itself off of to a degree are in coal. Russian energy ministry coal official Petr Bobylev told the Duma this week that there has been a 20 percent decrease in coal exports year-on-year in recent months.


U.S. and European officials insist that, in the long run, Putin cannot avoid catastrophic economic fallout from his aggression. “The economic crisis Russia faces will leave the Kremlin with fewer resources to prop up the Russian economy, pursue its invasion in Ukraine, and project power in the future,” U.S. Deputy Treasury Secretary Wally Adeyemo said Monday.

That may prove true eventually. The Biden administration this week imposed additional sanctions on Russian banks and individuals, following an April 6 announcement of what are known as “blocking” sanctions on Sberbank and on Alfa Bank, Russia’s fourth-largest bank, freezing their assets and barring any U.S. firms from dealing with them. That means 60 percent of Russian banking assets are now under U.S. sanctions, and Europe is gradually following Washington’s lead.

Russia’s central bank chief, Elvira Nabiullina, said on April 18 that supply shortages of technology and other parts would soon bite and that Russia “is entering a difficult period of structural changes associated with sanctions.” Experts expect a serious contraction of credit available to Russian individuals and businesses this year, with the economy shrinking by 8 to 15 percent. Over the longer haul, under current conditions, some economists project that Russia’s economy could be expected to contract by one-fifth or more in the next several years.

That trend will accelerate the longer the war goes on. Western and multinational companies are departing or suspending operations in droves, amounting to some 800 corporations out of 1,200 with operations in Russia so far, according to data from Yale University’s Russia disinvestment campaign. These include major brand names ranging from IBM and Microsoft to Cargill, as well as many consumer giants such as Kellogg’s, Nokia, and Panasonic. This in turn has caused what Moscow Mayor Sergei Sobyanin this week admitted was a serious unemployment crisis, saying in a blog post that “around 200,000 people are at risk of losing their jobs” in the capital.

“If he’s saying that number, it must be 10 times that,” said Jeffrey Sonnenfeld of the Yale School of Management, who is leading the Yale disinvestment campaign. Sonnenfeld compares the current campaign favorably to the boycott of South Africa in the 1980s. “That was 200 companies leaving the country back then. We have more than four times that now,” he said

Even in the EU there are stepped-up efforts to halt purchases of Putin’s main bread and butter: oil. In mid-March, the giant shipping group Maersk said it had stopped buying Russian oil due to Russia’s invasion of Ukraine, and this week Greece temporarily impounded a Russian oil tanker off the island of Evia.

“The U.K. obviously banned crude imports outright,” said Haines, the energy analyst. “The countries that have got longer-term contracts will still honor them, but they have stopped buying spot crude.”

Still, for the present, Russia’s revenue numbers are telling a very different story—one that reveals just how divided and uncertain the international response really is, and how attractive discounted Russian crude is at a time of rising energy prices and rampant inflation nearly everywhere. Nowhere is that truer than in the energy markets. According to the latest data, Russian crude exports have jumped in the first few weeks of April—with India, Turkey, and Italy taking in a lot more, and the rest of the EU pretty flat. While the United States, Britain, Australia, and Canada have banned Russian imports outright, most European nations, led by Germany, continue to buy.

The biggest percentage increase is from India, which has refused to join in the sanctions or condemn Putin’s invasion. Taking advantage of Putin’s big discounts in prices, India in just the last two months has taken in 17 million barrels of high-grade “Urals” crude from Russia, the Kpler expert Smith said, compared with 12 million for all of last year. (New Delhi in the past has bought most of its oil from Middle East producers and Nigeria, but it’s now getting a big discount from Russia.) Yet India’s intake is still dwarfed by Europe’s. Turkey has raised its import of Russian oil up 200,000 barrels a day in March to 300,000 this month, Smith said. Italy is also taking in more Russian crude so far this month, he added, raising its intake from 100,000 barrels a day to 300,000. Some of that crude is headed to European-based refineries still partially owned and controlled by Russia.

Since the start of his invasion, Putin has declared to his domestic audience that Western sanctions would only rebound on the United States and Europe because of Russia’s huge exports of energy and agricultural goods, causing inflation and economic distress in the West. And indeed, such fears have restrained U.S. President Joe Biden somewhat and dominated the debate so far in European parliaments. As JPMorgan analyst Natasha Kaneva said this week, eliminating Russian oil is going to cause every bit of the economic pain that Germany and other EU nations fear, possibly driving up prices by about 65 percent from about $110 to $185 a barrel.

That could be devastating to economies such as Germany’s, which gets 25 percent of its oil and 40 percent of its gas from Russia. Not surprisingly, Berlin has led the fence-sitting over the energy issue. Earlier this week, German Finance Minister Christian Lindner appeared to backtrack on a commitment made by Foreign Minister Annalena Baerbock to end oil imports by the end of the year, with a gas ban to follow later. “We have to be patient,” Lindner told the BBC. “We are willing to stop all energy imports from Russia, it’s just a matter of time.”

Washington and other Western capitals are also watching this weekend’s final round of the French election closely, as insurgent right-wing candidate Marine Le Pen, who is seeking to deny President Emmanuel Macron a second term, has said she opposes energy sanctions on Russia, and she hinted in this week’s debate that she would like to redouble France’s reliance on imported gas. The Biden administration is pushing for a tougher approach but remains leery of getting ahead of the Germans and the EU, seeking to maintain a unified approach.

Yet political pressures in the United States are also staying Biden’s hand to a degree when it comes to imposing sanctions that would strangle Russia’s energy sector. “It’s Vladimir Putin’s gas price increase,” Biden said Thursday of the pressures at the pump, reiterating his administration’s consistent line. Voters have tended to agree in recent polls that Putin and the oil companies bear most of the blame, but they also tend to penalize incumbents for a bad economy, and the Democrats face the almost-certain defeat in the forthcoming midterms. With inflation at 8.5 percent, Biden’s approval rating dropped to 33 percent in a Quinnipiac University poll taken earlier in April.

The Kremlin has also managed to orchestrate a newly powerful—and unsanctioned—banking center in Gazprombank, the financial arm of Russian energy giant Gazprom. Moscow is pressuring European nations and others to deposit payments in dollars in Gazprombank and receive rubles in return, according to senior U.S. and international officials. And thanks to the deft manipulations of Nabiullina, who has raised rates and imposed currency controls preventing Russians from taking money out of the country, the ruble exchange rate is about where it was in February. The government has also imposed an export surrender requirement requiring 80 percent of the hard currency from exports to be sold through authorized banks, particularly Gazprombank. Inflation in Russia is rising rapidly, with prices climbing more than double digits, but may not exceed 25 percent by the end of the year, according to various estimates.

“Sanctioning only some banks—as is now the case—allows Russian energy exports to continue, preserving the current account surplus and Russia’s rapid foreign asset accumulation,” the Institute of International Finance report said. “In other words, existing sanctions are re-jiggering foreign asset accumulation, not stopping it. Only an energy embargo or sanctions on all banks will do that.”

For Putin, the most imminent financial issue is that Russia may soon default on its overseas debt for the first time since the Bolshevik Revolution in 1918, having missed an April 4 deadline to pay in dollars. The country has been given a grace period, but even if it defaults on its $60 billion in sovereign debt, forcing foreign lenders to raise rates, Russia has already been barred from international borrowing and may be able to fund itself with energy revenues for a long time. Sanctions have already frozen the secondary trading market in Russian bonds. Even so, in a news conference on April 22, International Monetary Fund economist Alfred Kammer said that “while Russia at this stage doesn’t have any market financing needs,” its corporations are burdened by an outstanding debt of more than $400 billion and will have difficulty maintaining credit in the longer run. Those pressures could eventually force Putin to sue for peace sooner than he wants.

Meanwhile, doubts remain as to how many international companies are committed to withdrawing from Russia. Some major U.S. companies such as International Paper and Koch Industries continue to operate there, as do a slew of European, Indian, and Chinese corporations, including German steel behemoth Thyssenkrupp. Many are using subterfuge to avoid public condemnation, according to Yale’s Sonnenfeld. Some sectors such as Big Pharma are arguing that they provide essential medicines to Russia, though in many cases they are still selling over-the-counter drugs, he said. Others, including several American food companies, are using the excuse that they are selling “nutritional necessities” when in fact many of the products are just snack foods, Sonnenfeld said. In all, about 400 multinationals continue to do business in Russia, though some say they are postponing future planned investment, development and marketing or curtailing operations somewhat, Sonnenfeld said. On April 21 Koch Industries updated its policy for operating in Russia, telling employees that its Guardian Glass subsidiary “is working with its local management team to find an exit strategy that maintains our commitment to employees’ safety and does not result in the Russian government taking over the plants and financially benefiting from them. All other Koch companies, none with operating assets in Russia, have ended or are ending business activities there.”

Other companies are already trying to get around the Biden administration’s ban on investment in Russia though legal shenanigans, he said. “It’s frustrating as hell to see that where there are economic sanctions on future investment some companies are trying to fool internal regulatory pressure by saying, for example, this is not new plant equipment, instead we’re just repairing.”


For Putin, the biggest question going forward will be whether he can adapt his economy to long-term isolation. Other economies that have faced a similar stranglehold, like Iran’s, have done so, and Moscow can keep its banks running a long time on energy-generated subsidies if they become technically insolvent; Russia, unlike Iran, hasn’t faced a near-total strangulation of its energy exports. But the denial of Western imports of consumer goods and production materials and parts, and growing strains on Russian finances will eventually seriously damage the economy. And if unemployment soars, that could present Putin with a problem he hasn’t faced yet: survival in office.

“So far the government is continuing to backstop and pay some of these workers,” Fishman, the former State Department expert, said. “But how long can they keep that up? I think you’re going to see waves of unemployment in the remainder of 2022 almost regardless of what happens next on sanctions.”

Update, April 25, 2022: This article was updated to include a statement from Koch Industries on its presence in Russia.

Michael Hirsh is a columnist for Foreign Policy. He is the author of two books: Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street and At War With Ourselves: Why America Is Squandering Its Chance to Build a Better World. Twitter: @michaelphirsh

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